Commodity crunch to hit UK dividend growth next year

Jessica Morris
Follow Jessica
The London Stock Exchange has a high concentration of mining firms (Source: Getty)

The commodity crunch is set to stifle dividend-growth in London-listed companies next year.

Total dividend growth is expected to slow three per cent to £89.8bn in 2016, way below a 6.8 per cent projected increase to £87.2bn this year, according to a report by Capita Asset Services.

"The concentration of global mining firms listed on the UK stock exchange means investor dividends in the UK are more vulnerable to the current turmoil in commodity markets," Capita said.

Read more: Junior market feels the effects of China slowdown

The price of industrial metals like copper have fallen recently, straining the margins of mining companies, and leaving them with less to give back to investors. Glencore has already scrapped its dividend for 2016, allowing it to shore up its debt-heavy balance sheet.

Supermarkets, which includes Tesco and Sainsbury's, were singled out as "notable dividend cutters" this year, and the report said that we should expert their dividends to remain at the current low level in 2016.

"Companies tend only to cut their dividend in extreme circumstances, either if their profitability is permanently lower, or balance sheets are under pressure, so we still expect growth overall next year," Justin Cooper, chief executive of Shareholder solutions, part of Capita Asset Services, said.

"The top 100 in particular is struggling to make any headway. Income investors can take comfort in the fact that equities continue to offer a very attractive yield compared to other asset classes, but with risks abounding, they should ensure they keep their portfolios well diversified."

Read more: Commodity prices - Low point for investors? Wait until 2017

But favourable exchange rates helped shield investors from the gloom in the third quarter, with total dividend growth hitting a third-quarter high, swelling 6.8 per cent to £27.2bn.

This came despite the well-publicised cancellation of Tesco's dividend, as well as a cut from Sainsbury's.

Total dividends paid out by mining companies also rose during this period, largely due to exchange rates.

"The pound was lower against the US dollar in the third quarter compared to the same period in 2014. Half the dividends by value among the top twenty payers are declared in US dollars, so there was a large currency gain in the quarter," the report said.

Related articles